Local leaders weigh in on credit downgrade, what it means for Ark. River Valley residents

By Whitney Snipes

government@couriernews.com

So, the nation's credit rating has dropped - what now?

Commotion has reigned since Standard & Poor's (S&P) downgraded the United States' credit rating from AAA to AA-plus on Friday, but the exact effect the decision will have in the Arkansas River Valley is still unknown. When asked about the downgrade earlier this week, the responses of local business and community leaders were as varied as the individuals themselves.

Charles Blanchard, CEO of First State Bank, said he didn't foresee any visible impact in the Arkansas River Valley. In addition, he didn't think overall the impact on the American economy would be significant.

Blanchard pointed out that the score ranking was downgraded by only one of three credit agencies "and the one that did it admitted it was because of political turmoil."

That being said, he admitted the economy would be in for a long economic recovery process. Because the nation's budget will not allow for a lot of additional incentives for economic stimulation, "we will have to climb more slowly" toward economic recovery, he said.

Recovery is inevitable, though, and Blanchard doesn't see any possibility for sliding back into a recession.

"The good news for the River Valley is we did not enjoy the peak as much as a few other areas in the country ... Home values in our area, for example, have fallen less than five percent," he said, citing a report he said he recently received from area real estate agents.

"It's great time for those who want to gear up for future growth to invest in future projects," he said, adding "I think it will be a great recovery and the folks that invest in growth at this point in the economy are going to be looking like heroes long-term."

Carrying a less optimistic view than Blanchard, Robert McCready, coordinator for the Russellville River Valley Tea Party, said he wasn't altogether surprised by S&P's decision to lower the credit rating.

The Associated Press reported the S&P said it issued the downgrade "because the deficit reduction plan passed by Congress on (Aug. 2) did not go far enough to stabilize the country's debt situation."

McCready said Congress had been told by S&P and similar agencies to reduce the deficit by $4 trillion within 10 years, but the debt deal that was passed served only to curb the interest on the federal debt.

"They didn't listen," he said of Congress. "They don't listen, and they blame everyone else."

Neel Kashkari, a managing director at PIMCO, said the recent budget deal made none of the hard choices that will be needed to bring the government's budget closer to balance. Kashkari is the former manager of the government's $700 billion bank bailout fund.

"Until Republicans and Democrats show an ounce of backbone and do what's in the interest of the American people, rather than what's in their own immediate political interest, I can't argue with S&P's conclusion," he said in an interview on CNBC.

McCready said he believes one of the most apparent effects Arkansas River Valley residents can expect to see is increased prices on everything from groceries to cars. With a lower credit rating, interest rates on loans will increase, leaving companies to pass on higher costs to consumers.

To cope with the increased financial insecurity, he advised local residents to work toward personal stability by doing away with credit cards, making purchases with cash and putting at least $25 per week into savings.

"You've got to squeeze it down to what you spend," he said, and advised the federal government do the same thing.

Otherwise, McCready said, the economy is in danger of sliding even further.

"I can see a depression coming," he said. "Not a recession, but a depression."

Offering more caution than Blanchard and less "doom and gloom" than McCready, Tony Moore, owner and broker at Moore and Co. Realtors, said he believes people will become more cautious in the wake of the downgrade and may begin to look for new investment sources.

"Perception is reality, often," he said. "So, if people perceive it to be bad it will be bad."

Although he believes there will be a short-term impact as people struggle with coming to terms with the downgrade and what it means for them, he thinks in the long term the current economic uncertainty will lead to a "good callback to sound, basic philosophy of good savings-based and careful spending habits."

Echoing Moore's middle-of-the-road mentality, Richard Johnson, owner and CEO of Russellville-based Johnson Investment Group, said he believes the overall impact of economic uncertainty spurred by S&P's credit downgrade will fall "somewhere in between the extremes."

"Yesterday was an extreme, today was an extreme, long term it's going to land somewhere in between and America as we know it is going to survive another couple hundred years," he said

Where Moore and Johnson differ is on their opinion on where and how the most solid investments can be found while the economy works toward recovery.

With Monday's dip and Tuesday's rise in the stock market, Johnson said investors with sound long-term plans need not be overly concerned, adding "if you're going to be in the market, you have to be able to control your emotions" during times when many are panicking.

Nationally, some economists side with Johnson. Investors continued to buy Treasurys on Monday, seemingly defying S&P's analysis.

"With investors willing to hold trillions of dollars in long-term U.S. debt at interest rates well below 3 percent, the financial markets certainly do not seem to share S&P's concern," said Dean Baker, an economist at the Center for Economic and Policy Research, in an email.

"If you can't control your emotions, then put it in an interest-bearing account and forget it," Johnson said. "... Those that invest in America, invest in the companies that you and I use every day. We're providing the capital to provide the services that you and I use every day."

He also noted that low prices often mean a great time to buy and said "there will be some forehead slapping" when people realize the opportunities they missed.

Moore, however, predicted a movement "from stocks to brick and mortar" investments. He noted Arkansas Tech's continued growth and influx of students create an ever-increasing demand for rental properties in the Russellville area. He said there are still "excellent" interest rates and values to be had in the real estate market as well.

The one area that will hurt the most will be the commercial sector, and "that's a real sad indictment," Moore said.

Uncertainty in the financial market means less money to pour into development deals, he said, adding stunted commercial growth will likely be the "toughest deal" in the Arkansas River Valley.

In such uncertain times and with such varied opinions, which is right? Perhaps Jeff Pipkin, Russellville Area Chamber of Commerce president, put it best.

"I have no idea what that's going to mean, and I'm not sure anybody does," he said. "... It's too early to have an answer."

The Associated Press contributed to this report.

How to learn if the US downgrade could affect you

By The Associated Press

After more than four years of a housing market crisis and major changes in credit card terms, it may be hard to believe that many consumers don't know what types of loans they have.

Do you have a fixed-rate mortgage or an adjustable-rate mortgage? What might cause your interest rate to change? How often could it adjust? And what about your credit cards? Do they have a fixed or variable rate?

Research shows many people can't answer these questions.

"An amazing number of people don't even know if they have an ARM or a fixed rate," said Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

Those details are spelled out in the note that a homeowner signs at closing. But like the rest of the pile of papers that pass by during a closing, it's often a document that gets a once-over and then gets filed. And for credit cards, the booklet of terms that's mailed once or twice a year often doesn't even get that cursory level of review. It's just dropped in a file or thrown away.

Here are some questions to ask as you try to assess whether your loans could be affected by the market turmoil:

 Can my interest rate increase?

If you can't find the note in your mortgage packet, contact your bank and ask if the rate on your home loan is adjustable. For credit cards, if you tossed the last update of your terms, you may find some details on your statement or you might have to call the number on the back of your card.

 What benchmark or index is my loan or card tied to?

Mortgage rates are often directly tied to the yields, or interest rates, on Treasury bonds. This makes home loans the most vulnerable to the downgrade of U.S. debt. However, so far there's been little evidence that investors view U.S. Treasurys as risky investments. That perception would have to change in order for interest rates to climb significantly.

Home equity loans and credit cards are more often linked to the prime rate, which is less likely to change based on the downgrade.

 How much might my monthly payments increase?

Many adjustable rate mortgages set caps on how much interest rates or payments may rise. For credit cards, existing balances are protected from rate hikes even on variable rate cards. But new charges would carry the higher rate, which would drive up payments.

 How many times per year can my rate adjust?

Home equity loans are most likely among consumer borrowing to adjust on a monthly basis, followed by credit cards.

Mortgages often have limits on the number of times per year rates can change, but that varies widely depending on the source of the loan and when it was opened.